Traders Jump Ship
Fundamentals
Bond futures have given up a good portion of the gains made last week, after the EU unveiled its $1 trillion rescue plan. Bonds rallied sharply during the peak of the Greek crisis last week, showing that investors prefer US treasuries over any other sovereign debt in times of crisis. Many traders remain skeptical that the EU rescue plan will be enough to prevent defaults, as governments must show restraint when it comes to spending for any plan to work. This is a phenomenon not only in Europe, but across the globe. Governments continue spending well above their means, hoping that a recovery will increase capital inflows in the form of tax dollars. Thus far, that has not happened. The US itself is guilty of spending well above its means, and the situation in Europe should serve notice that even the US can fall into this trap. In the meantime, some traders may continue to look to the Bond market as a safe haven if the EU situation worsens. US banks, which are still recovering from the housing bubble collapse and economic downturn, are said to have significant European debt exposure, which can be seen as supportive for Bonds. If the EU plan succeeds, Bonds could face significant downward pressure, as dissipating concerns would favor stocks over debt. Also, the Bond market can be seen as very oversupplied at the moment, suggesting prices could fall sharply once panic buying stops. For the time being, many traders will continue to take their cue from Europe.
Trading Ideas
The EU rescue plain has brought some sense of stability back to the treasury markets after a chaotic week last week, which was exacerbated by a trading error causing equities to drop sharply on Thursday. This could be seen as bearish in the near-term, possibly causing Bond prices to reverse course in the near-term. Barring another market panic, the upside potential of Bond prices seems limited because of expectations that he Fed may begin tightening this year. The chart also seems to support a bearish near-term view. For this reason , some traders may wish to enter into a bear put spread by buying the June Bond 120 puts (USM0120P) and selling the June 118 puts (USM0118p) for a debit of 0-25, or $390.63. The trade risks the initial investment for a potential profit of $1,609.37.
Technicals
Turning to the chart, we see the June bond contract reverse sharply from contract highs made last Thursday. This suggests that the uptrend that began in early April may reverse course in the near-term. The market may come down to test support around the 118-00 level in the short-term. In order for the market to maintain its upward momentum, prices will likely have to close above the recent high close of 123-11. The RSI has come back down to neutral levels, after registering an overbought reading of 77 on Thursday.
Robert Kurzatkowski, Senior Commodity Analyst
